Week in Review

The problem all our big cities are having is the cost of pension and retiree health care for their public sectors. These cities made ridiculous promises during their contract negotiations with their public sector unions. Promising them generous pension and health care benefits for life for retirees. Benefits a later generation would have to pay for. Which is why these cities are imploding under these costs. And why Detroit filed bankruptcy. These cities never put away the money for these future benefits because they were just too costly. Besides, they no doubt thought, when the bill comes due it will be someone else’s problem. And that’s where we are today.

How bad is it? Really bad. Especially in Detroit. A city that has about half the population it had when it entered into those agreements. And nowhere near the automotive industry it had back then. A race riot in 1967 caused a white flight. And the black middle class would follow years later. As the jobs left Detroit for the suburbs. And the people followed those jobs out of the city. Just decimating the tax base that has to pay those unfunded benefits (see The Retirement Surprise In Detroit’s Bankruptcy by Robert C. Pozen posted 7/25/2013 on Brookings).

When Detroit recently filed for bankruptcy, one number surprised a lot of observers–$6.4 billion in other post-employment benefits (OPEB). OPEB is primarily comprised of unfunded obligations to pay health care costs for municipal employees.

By contrast, the unfunded pension obligations of Detroit were $3 billion–less than half the size of its OPEB…

The Pew Charitable Trust did a study in 2013 of both pension and OPEB shortfalls in the 30 largest cities in the United States. The three cities other than Detroit with the largest pension shortfalls were:

$14,302 per city household in New York City;
$12,170 per city household in Philadelphia; and
$11,389 per city household in Portland, Oregon.

But the shortfalls for OPEB, primarily healthcare obligations, were significantly larger. According to Pew, the three cities other than Detroit with the largest OPEB shortfalls were:

$22,857 per city household in New York City,
$18,962 per city household in Boston
$13,487 per city household in San Francisco.

These numbers are staggering. Based on the U.S. Census, there are about 264,209 households in Detroit. If you divide the total unfunded pension and health care costs by the number of households you get $35,578. That is, to pay this outstanding debt it will cost each household in the city of Detroit $35,578. Which will be very difficult to do when the median household income in Detroit is $27, 862.

Those in the union say these people are owed their retirement and health care benefits. Because they made a deal. But they didn’t make a deal with the people currently paying the taxes. What this amounts to is generational theft. Like all those municipal pensions and health care benefits. For when they made those generous agreements the people who ultimately had to pay them weren’t in the room when they signed those contracts. In fact they weren’t even born yet. The people demanding their benefits now and their union representation apparently had no problem sticking it to future generations. They were the ones in the room when they signed those contracts. And didn’t give the people stuck paying for their benefits a second thought.

All big cities with big public sectors have the same problem. They may not be ‘Detroit’ bad but they have bills that they won’t be able to pay. There are about 100 U.S. cities with a population of a quarter million or more. If each one of them had this problem that’s about $1 trillion in unfunded benefits just in these cities alone. With trillion dollar deficits already, Obamacare coming on line and Social Security and Medicare projected to go broke the federal government just won’t be able to bail these cities out. Perhaps bringing the days of generational theft to an end. Which may be the only good thing to come from a wave of municipal bankruptcies.